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Weak approvals point to further rate cuts

A fall in building approvals in December suggests the Reserve Bank Australia may need to cut the cash rate again in the next few months.

Residential building approvals fell 4.4 per cent to 12,767 units in December, figures released by the Australian Bureau of Statistics on Monday showed.

JP Morgan economist Tom Kennedy said the ABS figures also showed approvals for houses fell for the first time since April 2012.

"That is quite worrying because detached dwellings really give you the underlying sense of what's happening in the housing market," he said.

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Mr Kennedy said the building approvals data suggested the RBA may need to cut the cash rate (currently at three per cent) again in the next few months in order to support the housing construction sector.

"When you look at the number of building approvals in level terms, they are significantly lower than they were in 2010 and 2009 and if you want to see those levels return I think the RBA is going to have to provide a bit more of an accommodative stance over the coming months," he said.

However, Mr Kennedy said an improving outlook for the global economy, including stronger growth in China, meant the RBA would keep the cash rate on hold at its February board meeting on Tuesday.

Commsec economist Savanth Sebastian said the building approvals figures have been modestly weaker over the past few months.

"It's certainly improving off a low base but there is no significant revival in new approvals coming through," he said.

"The trends are certainly encouraging but I think it's going to be a steady crawl."

The Reserve Bank of Australia will meet for the first time this year on Tuesday and is widely expected to keep the cash rate at three per cent after making a quarter of a percentage point cut at the December board meeting.

Mr Sebastian said he doesn't expect the December building approvals figures will cause the RBA to make another rate cut.

"I think they'd certainly be looking at the global economic conditions," he said.

"It's very hard to see the Reserve Bank cutting rates tomorrow given the way equity markets have moved.

"Keep in mind we don't need to see a huge asset appreciation in property, if we're getting it in equities it leads to more wealth and income flowing around the economy.